Tumultuous Trade Into CPI

WHERE WE STAND – A choppy day, yesterday, as markets yo-yoed around, with conviction somewhat lacking, ahead of a deluge of event risk including today’s US CPI print, and Inauguration Day next Monday.

That said, something of a more optimistic tone did seem to prevail as the day progressed, with risk appetite initially receiving a fillip on the back of reports that President-elect Trump may ‘phase in’  tariffs gradually over a period of time, increasing levies by between 2% and 5% per month, as opposed to the ‘everything, all at once’ approach that had previously been expected.

Of course, while precise and concrete trade plans remain unclear, such a graduated approach would likely be one preferred by market participants, given that – at the margin – a plan of this ilk introduces the possibility that eventual tariff rates are not as high as had been feared, thus somewhat reducing upside inflation, and downside growth, risks.

In addition to this, participants still have the shenanigans of last week, and Trump’s prior term, fresh in their minds, whereby sources reports can, and often are, rubbished by the Administration in the hours and days following the stories breaking. Hence, participants continue to adjust to a world of greater policy uncertainty, subsequently higher cross-asset volatility, and are consequently displaying a considerably lower degree of conviction than may usually be in evidence.

Taking this into account, it was perhaps unsurprising to see initial gains in the equity complex slowly but surely fizzle out as the morning session progressed, with the S&P future eventually erasing all of the earlier advance, trading back to the flat-line.

Almost as soon as that flat-line was reached, though, markets reversed course once more, by virtue of cooler-than-expected US PPI figures – with factory gate prices having risen 3.3% YoY last month, compared to the 3.5% YoY consensus. Of note, though, the components of PPI that feed into the Fed’s preferred PCE inflation gage were relatively hot, with a particularly notable increase in domestic airfares. Consequently, the figures shan’t materially alter the FOMC outlook, with the USD OIS curve continuing to discount just 28bp of easing, in total, this year.

Consequently, market moves in the aftermath of the PPI print were relatively short-lived, with the 5bp rally across the Treasury curve, and all of the upside in equities, fading almost as soon as they’d begun. Once again, this points to a continued lack of conviction among market participants, with most of the post-release vol likely positioning for today’s CPI print, as opposed to fresh longs entering the market.

Participants default position, into inauguration day, remains short bonds, flat risk, and long USD, with CPI unlikely to move the needle too much on that front.

Meanwhile, here in the UK, it was another day where the fiscal backdrop remained in focus. Having initially advanced at the open, by around 5bp across the curve, Gilts ended back where they started, with long-end yields having risen marginally, finding renewed selling pressure after Chancellor Reeves’s remarks in the commons brought nothing by way of fresh information, and were taken as an invitation to just keep selling.

More importantly, even though Gilts were relatively stable on the day, even yields staying here is a significant issue as, when coupled with stagnant economic growth, the Chancellor’s fiscal headroom has been all but wiped out. Markets, clearly, are gunning for the Government.

LOOK AHEAD – Plenty for participants to get their teeth into today.

The aforementioned US CPI figures will, naturally, stand as the most significant release – headline inflation is seen at 2.9% YoY in December, 0.2pp higher than the November pace, while core prices should hold steady at 3.3% YoY. While the chances of a January Fed cut are already near-non-existent, bond bears are likely to need little invitation to embark on a renewed round of selling, given recent price action. Furthermore, it was interesting to observe equities focusing more on the policy path, than the ‘resilient economy’ narrative after Friday’s jobs report, again a dynamic that could repeat were CPI to come in hot later on.

Inflation figures are also due from the UK today, coming as gilts remain on incredibly shaky ground. Headline CPI is seen holding steady at 2.6% YoY in December, while core and services metrics are set to dip a touch, to 3.4% YoY and 4.8% YoY respectively. Figures in line with consensus would likely give the BoE license to deliver a 25bp cut in February, while proceeding with a relatively cautious pace of further easing going forward. That said, a hotter-than-expected CPI figure will be the worst of all worlds for the Bank, and HM Treasury, likely lighting a fire under gilt yields, and putting 5% on the 10-year firmly within reach today.

Lastly, Q4 earnings season kicks off on Wall Street later, with JPMorgan, Citi, Wells Fargo and Goldman Sachs set to report before the open. Per FactSet, S&P 500 earnings growth is seen at 11.7% YoY in Q4 24, which would be the strongest such rate in three years if realised, while overall revenues are set to have grown for the 17^th quarter in a row.